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In the money: Policy inconsistency scaring away investors

The International Monetary Fund (IMF) has warned that United Kingdom’s economic growth is at the risk of the uncertainty arising in the run-up to the referendum on the country’s European Union (EU) membership this June. Telling CNN this last week, IMF’s chief Christine Lagarde echoes that “uncertainty is bad in and of itself. No economic player likes uncertainty. They don’t invest, they don’t hire, they don’t make decisions in times of uncertainty”.

NESBERT RUWO & JOTHAM MAKARUDZE

The uncertainty around the future of UK with respect to its EU membership is already putting the pound (UK’s currency) under pressure. The pound tumbled below $1,39 for the first time in seven years on Wednesday as economists and analysts warned that quitting the EU would damage the UK’s growth prospects. HSBC is predicting that the pound could slump by 20% in the event of a Brexit (Britain’s exit from the EU) vote while a number of analysts are predicting a further pounding of the pound if the “out” campaign wins.

Down south of the Limpopo, the unwarranted removal last December of the then Finance minister Nhlanhla Nene and replacement with the little-known David van Rooyen sent shockwaves throughout the country and surprised many an investor. Moreso, van Rooyen was subsequently removed from the position after only serving four days on the job to be replaced by the former Finance minister Pravin Gordhan. With this, South Africa broke records by having three different finance ministers in five days.

The value of the local currency, the rand, dropped more than 6%, touching record lows of almost R17 to the US dollar, on the breaking of the news. Banking shares on the local bourse, dropped by more than 10% to levels last seen in the immediate aftermath of the 2008 global financial crash.

The interest rate on the long government bond, the R186, spiked by more than a percentage point following the announcement, meaning that government will pay more on interest on its borrowings, which interest cost could crowd out government spending on social and development needs. When the at least one percentage point increase in long-term interest rates is applied to the government budget deficit of R159 billion, it adds at least R1,6 billion in government debt servicing costs.

The reaction of the market could be viewed as the market’s conclusion that the removal of Nene might have been perceived as the beginning of a fundamental change in government fiscal and monetary policy. The perception in the market is that the reason that Nene was “fired” is that he was doing his job, insisting on fiscal discipline. The firing of Nene, now jokingly referred to as the Nene-gate, cost the economy at least R500 billion in lost value of South African stocks and bonds.

And in Zimbabwe, the indigenisation policy inconsistencies only serve to contribute to a climate of policy uncertainty. The country needs to have one voice with regards to what is expected of the indigenisation programme. Research and Advocacy Unit (RAU)’s Chaos Clarified — Zimbabwe’s “New” Indigenisation Framework report notes that the inconsistencies in the indigenisation policy arise from the  disconnection between “the Act as it is, the Act as various government officials think it ought to be and the implementation of the law, or its conceptualisation, in practice”. According to RAU, the Act, the regulations, general notices, and actions by successive ministers do not conform to each other. The uncertainties and inconsistences are costing the country the much- needed investment.

The US National Bureau Economic Research 2015 report on measuring economic policy uncertainty using an index of economic policy uncertainty (EPU) points to the fact that policy uncertainty raises stock price volatility and foreshadow declines in investment, output, and employment.

Theory and practice all suggest that elevated policy uncertainty has adverse effect on macroeconomic performance. When investors and businesses are uncertain or confused about government and regulatory policy, they adopt a cautious stance and wait for periods of certainty and clarity to invest and expand. We would want to call that the uncertainty effect — the unknown government’s next moves, political squabbling, and unwarranted policy shifts. That’s what scares investors. While it is often thought that it is tough policies that deter investors, this is a misconception as investors would rather find ways of working within the parameters set by those tough policies, as long as there is commercial viability, than operate in a fluid policy environment.

The level of policy uncertainty and its adverse impact on investor/business confidence in the country could be meaningfully reduced if the process of policy formation encompasses coordination, rationality, consultation, collaboration and constructive criticism. While the responsibility for policymaking typically rests with the government, it is essential that policy documents are informed by the opinions of all relevant stakeholders.

South Africa’s National Development Plan and Zimbabwe’s own Zim-Asset should serve as guiding frameworks in the policymaking process and the plans should be used as the basis for coordinated effort and action by all citizens to build a prosperous society. Having a long-term national plan as a guiding framework, could in itself reduce the policy contradictions and inconsistencies. Internal inconsistences in these blueprints such as pushing for industrial beneficiation in an economy facing an energy crisis have to be addressed through a critical path approach to ensure success.

Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest.co.za

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